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Pentagon eyes budget shift for Iraq

U.S. Defense Secretary Chuck Hagel said Thursday that the Pentagon may have to review its fiscal 2015 budget plans as it intensifies action against the Islamic State, though analysts suggested the push can be funded from existing spending plans, The Wall Street Journal reported.

The U.S. is continuing airstrikes in northern Iraq, boosting surveillance in the region and accelerating arms sales to the Iraqi regime, while the Pentagon also warned it may have to take the effort into neighboring Syria.

"We've had to move assets over the last couple of months," Mr. Hagel told reporters at a Pentagon briefing. "That costs money, that takes certain moneys out of certain funds." He called the Islamic State, also known as the Islamic State of Iraq and Syria, a long-term threat, and Pentagon leaders have said the airstrikes could continue for months.

An extended air campaign could cost around $500 million a year at its current pace, estimates Byron Callan at Capital Alpha Partners LLC. Like other analysts, he expects most of the U.S. action to be paid from the Overseas Contingency Operations budget, or OCO, better known as the Pentagon's war fund.

"The costs of ongoing operations [in Iraq] can likely be accommodated in OCO budgets and should not siphon funds off from the base budget," said Mr. Callan in a note to clients.

Defense contractors also said the latest Iraqi conflict had given a small boost to intelligence-related work in the run-up to the end of the government's fiscal year, when Pentagon contract awards typically pick up.

Ken Asbury, chief executive of CACI International Inc., told investors Thursday that it was adding staff to handle contracts that had been previously been winding down.

The war fund has been cut as the U.S. drew down operations in Iraq and Afghanistan, though the Pentagon in June asked lawmakers to approve $58.6 billion for fiscal 2015, which starts Oct. 1, down from $85.3 billion in 2014. That's on top of the department's $496 billion base budget.

The wider Pentagon and State Department 2015 budgets include $5 billion earmarked for counterterrorism operations.

One wrinkle is that the Congress is unlikely to finalize the 2015 budget until after November's midterm elections. The House and Senate bills have still to be reconciled, and a growing number of industry executives expect a short-term continuing resolution, which would freeze funding at 2014 budget levels, possibly into January.

"I think we're fine for fiscal year '14 and we'll have to continue to gather the data and see what it does to us in '15," said Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, when asked about potential budget changes at the Pentagon briefing.